Outlook: ITV faces its Waterloo as digital competition raises the odds

Next week brings news after a lengthy Competition Commission investigation of whether Carlton should be allowed to merge with Granada to create a single ITV for England and Wales. There's no point at this late stage in urging one course or another. For better or worse, the decision has already been made. It only awaits public disclosure. None the less, if the Government is serious about wanting to preserve a big league, free to air commercial broadcaster in Britain, capable of providing some sort of an antidote to the BBC, then this merger has to be allowed to go ahead.

The cost savings are not worth that much - between £30m and £60m depending on what conditions the Government imposes on the merger. Not that they should be sneezed at, but of themselves they won't save ITV. Rather, the benefit comes more from critical mass, clarity of purpose, operational streamlining, and unity of strategic thinking. As things stand, the relationship between Carlton and Granada is characterised by rivalry verging on outright hostility.

The two chairmen, Michael Green and Charles Allen, don't get on and rarely see eye to eye on anything other than the need to merge. Perhaps as important, the two boards don't trust each other. Granada regards Mr Green as volatile and unpredictable, and Carlton regards Mr Allen as an uninspired numbers man with no flair or imagination. In any case, no organisation can successfully be run by two bosses. In a market where ITV is up against two heavyweight gorillas, each determined to smother ITV out of existence, organisational division becomes more debilitating still.

With the growth of multi-channel television, ITV's position, both in terms of audiences and advertising, is being steadily eroded. Yet despite the progressive loss of market share, ITV still has more than half of all TV advertising, which is where the problem arises. Nobody fundamentally disagrees with the idea of a single ITV. In network terms, ITV is meant to be a single organisation anyway. But lots of people object to a monopoly position in the advertising market.

If things were left as they are, ITV's share of the market would eventually erode to a position where a merger would become acceptable to advertisers, but by that stage it would in all probability be too late. By then ITV would be just another niche player, like Channel 4 and Channel 5, just another channel among many. Is that what we really want, with much of ITV's best product auctioned to the highest bidder and as likely as not running on pay TV?

Much of the pain at ITV in recent years has been self-inflicted, in particular the disaster of ITV Digital, which was a completely misjudged endeavour. Yet against the backdrop of an extreme cyclical downturn in the advertising market, ITV has also had to contend with a resurgent BBC, whose inflation-busting licence fee agreement with the Government has allowed a certainty of future revenue streams denied to all rivals. This has allowed the BBC to invest heavily in digital channels, thus bolstering its position in the multi-channel market, at a time when ITV has been struggling to provide just the basic product.

ITV is further handicapped by the fact that it has to pay the Treasury £300m a year for its analogue spectrum. On top of that is the £250m that Carlton and Granada are forced to spend each year on their public service broadcasting obligations - that is arts, religious and other minority interest programming. Greg Dyke, Director General of the BBC, recently suggested that the franchise fee was such a disadvantage that it might actually pay ITV to go wholly digital, to hand back the licences to the Government and transfer the signal onto Sky, cable and Freeview.

Both Carlton and Granada regard the idea as very much the nuclear option, but if there isn't give over the next year from the Government in redistributing the TV tax burden more evenly with the BBC and BSkyB, neither of which pay the Government anything at the moment, then they might be sorely tempted to take that route, depriving non-digital viewers of ITV altogether.

All this may be irrelevant to the deliberations of the Competition Commission, whose remit is to decide the outcome not on the basis of public policy objectives about what sort of a broadcasting industry we want Britain to have, but the narrow issue of whether the merger is anti-competitive for advertisers. Carlton and Granada believe and hope they have convinced the Commission that behavioural remedies are capable of addressing the competition concerns. Existing advertising deals would be frozen, say for a period of three years. Unfortunately, advertisers regard such an undertaking as impossible to police, and instead insist on complete divestment of the two companies' advertising sales houses.

It is just about possible that ITV could live with the divestment of one sales house, but two? It is hard to think of any other industry where the main business is entirely divorced from the revenue stream. Haim Saban, the American media tycoon who has admitted to an interest in buying ITV, said at a recent conference that any such separation would render ITV unsaleable. Both Carlton and Granada would also regard double divestment as a deal breaker if the sales houses were incentivised to compete against each other for air time and advertisers, costing more than £100m a year in lost revenues. And if they weren't, it would be hard to see the point of divestment.

So we await with bated breath. The City is largely of the view that the merger will be allowed on reasonable terms. I'm not so optimistic myself. Yet without a positive outcome, I fear for the future of ITV, locked as it would be into dual ownership of a declining network, while the faster-moving reptiles of the digital age breed all around.

Mikhail Khodorkovsky, boss of the Russian oil giant Yukos, denied yesterday that he was in talks to sell a piece of the action to Exxon-Mobil, but the market is not taking nyet for an answer. After all, wasn't that Exxon's Lee Raymond sharing a platform with him in Moscow yesterday?

Now Yukos has leapfrogged Lukoil to become Russia's biggest oil producer by swallowing up Roman Abramovich's Sibneft, the temptation may be just too great. And what better way for the West's biggest oil major to celebrate Russia's conversion to global capitalism than to buy a stake in the East's biggest producer?

With expensive hobbies and lifestyles to finance, the Russian oligarchs seem as keen to cash in their chips as the western majors are to buy them. Mr Abramovich, the proud new owner of Chelsea football club, went shopping again yesterday, this time for a new house conveniently close to his stadium, and ended up spending £28m on a pad in Eaton Square.

The Exxon-Yukos deal may not happen today or even tomorrow, but happen it will. For one thing, Exxon cannot afford not to have a toehold in a market where Shell and BP have already taken the plunge. For another, Russia is the new frontier. It holds the world's largest known oil reserves, and although a lot of it is deep beneath the frozen Siberia tundra, it can still be extracted for a fraction of the price that it costs in the West.

BP, having been mauled once by the Russian bear, has decided the country's political and legal structures are now stable enough to invest hard cash and so has Shell. An Exxon-Yukos deal would dwarf anything that has come before. Yukos-Sibneft will have a market value of about $45bn, meaning that Mr Raymond will have to fork out around $20bn for the 40 per cent stake he is reportedly seeking. The flip side is that the bigger Big Oil gets, the larger the risks it can afford to take by investing in places like Russia.

Can President Putin sell such a deal to the electorate, when he has a revitalised communist party attacking him for handing Russia's natural heritage to foreigners? Perhaps not, but redneck though he is, Mr Raymond may prove a less bothersome bedfellow than Russia's own inimitable breed of home-grown capitalists with their overarching political ambitions.